But… since the November bottom, the Bitcoin exchange rate has advanced versus the US dollar by more than 300%, from 2 $ to 6-7 $ per Bitcoin.

The big news now is that the new Bitcoin rally will likely be even stronger than the first rally from April 2010 to June 2011.

This first rally led to a 10,630-fold increase from 0.003 $ to 31.89 $. In the hottest phase from March to June 2011, investors and traders entered a race to put funds into exchanges and buy Bitcoins.

There are three main reasons why the second Bitcoin race will likely be faster than the first:

Fundamentals are stronger than before.

There are many more Bitcoin businesses than in spring 2011. BitcoinDeals.com, for example, is a shopping portal offering more than 370,000 products from Armani and Gucci fragrances to electronics from HP and Cisco . All can be purchased with Bitcoins, physical Bitcoins from Casascius.com, and many more.

Bitcoin analysts see evidence that the new, second rally leg will be a major wave up. According to Elliott Wave theory, this rally is typically stronger than the first wave, and it should lead to new all time highs above 31.89 $, the June 2011 high.

Psychology has turned up

After multiple issues in spring and summer 2011, including hacks of the biggest exchanges, security flaws, fraud, etc. Security has improved and this led to more trust in Bitcoins than ever before.

Investor optimism has also improved, with more people being bullish than bearish on Bitcoins (current bullish consensus is at 78.9% per our online poll here).

Once the account is funded with fiat money, basically, Bitcoins can be traded in the same way as stocks, Forex, Gold, Silver, or other commodities: Just place an order, set a limit and then get the trade executed – it’s a matter of seconds.

However, Bitcoins cannot (yet) be traded on regulated exchanges via online brokers like eTrade, ameritrade, etc. If people do not have funds in Bitcoin exchanges, it can take up to a couple of days to have funds transferred to the Bitcoin currency exchanges. If Bitcoin prices are rising during that deposit delay, people will miss this part of the rally. And this is exactly why there has been the “Race” for bitcoins in spring 2011. People were racing to find the fastest way to get funds into Bitcoin exchanges.

One of the biggest questions in the Bitcoin forum at the time was “how can I get my funds fastest into MtGox” (the biggest Bitcoin exchange). Here are just two revelatory comments from the forum:

“It amuses me that some people have been wanting to invest in Bitcoins for weeks, but haven’t been willing to pay even 1% to get money into the most liquid exchange. Meanwhile the price has soared. What’s 1% compared to 1460% gain in just about 5 weeks?” — May 14

“buyers are probably chomping at the bit waiting for the influx of dwolla/gox money”. — May 18

The Gold Race in the Last Decade

When we think about store of wealth, Bitcoins are in many ways similar to Gold. It is not far-fetched to call Bitcoins “Gold 2.0” or virtual Gold.

Since the start of a big rally in 2003, Gold physical holdings of Exchange Traded Funds have increased multiple times. At the same time, Gold prices increased from 200 $ to 1900 $ at the high, an almost perfect correlation to the fund inflows.

Which asset was stronger in 2011, Bitcoins or Gold? This is answered by the Bitcoin / Gold ratio. As evident in below chart, Bitcoins have outperformed gold and probably most if not all other financial assets since start of Bitcoin trading in April 2010.

While the gold rally has finally faded over the past months (Gold is down from the $1900 to $1600’s), Bitcoins may be the taking the lead.

Run to Bitcoin

Often, a great way to look into the future is to look for repeating patterns in the past. When we look at volume price trend, we see that massive Bitcoin rallies erupted in fall 2010 (a 17-fold increase) and spring 2011 (a 65-fold increase), as evident in the below Bitcoin chart. Together with these Bitcoin price increases, the price volume trend indicated higher demand for Bitcoins than supply, which was largely driven by fund inflows into the exchanges.

Click chart to enlarge

In our opinion, most indications are pointing to a major rally to new all time highs in Bitcoin prices.

And the most likely outcome is that a new Bitcoin race is underway. Bitcoin prices have already advanced by more 300% since the November low and at 6-7 $, are still way below the 31.89 $ high from June 2011. If the current race is just re-testing this high, there is another 4 to 5-fold increase possible.

And, putting this into the broader context of the likely Euro break down and more widespread turmoil in financial markets in 2012, Bitcoins may well be the best or at least one of the best financial assets – possibly a better store of value than even Gold.

–S3052

Disclaimer: This article is not investment advice. Bitcoin could become one of the best investments in the financial world, but there are significant risks involved related to Bitcoins and, like other financial assets, it is possible to lose money. Always do your own due diligence, and consult your financial adviser before doing any investing. Long-term trading success or positive investments require accepting errors and uncertainty if one wants to forecast probabilities in the future. S3052 owns and trades bitcoins from time to time. Never invest unless you can afford to lose your entire investment! @BitcoinAnalyst